No Collection Rights for IRS-Assessed FBAR Penalties – Houston Tax Attorneys

The IRS’s historical abuses led Congress to create specific taxpayer rights, including rights stemming from collection due process (“CDP”) hearings. These administrative hearings are intended to pause IRS collection actions while the IRS Office of Appeals considers whether the collection is both lawful and warranted.

One might assume these rights extend to any liability assessed by the IRS. Since the IRS is part of the U.S. Treasury, it would seem logical that these rights would apply to any liability owed to the Treasury, especially when the Treasury delegates assessment authority for the liability from one of its sub-departments to the IRS, which is another one of its sub-departments.

The fact that a liability originated with another sub-department shouldn’t matter if that original sub-department never handles the liability because it has been fully delegated to the IRS, the other sub-department. However, as the Jenner v. Commissioner, 163 T.C. No. 7, case demonstrates, this assumption is incorrect. The case involves Foreign Bank Account Reporting (“FBAR”) penalties assessed by the IRS.

Facts & Procedural History

This case involves a couple who were assessed FBAR penalties for tax years 2005 through 2009. The penalties relate to foreign bank accounts that were not reported to the Treasury Department.

When the couple did not pay the penalties, the Treasury Department’s Bureau of the Fiscal Service (“BFS”) informed the couple that funds would be withheld from their monthly Social Security benefits through the Treasury Offset Program (“TOP”) to pay these penalties.

In response, the couple submitted Form 12153, Request for a Collection Due Process or Equivalent Hearing, with the IRS. The IRS issued a letter to the couple saying that FBAR penalties are not taxes and therefore not subject to CDP requirements.

The taxpayers filed a petition with the U.S. Tax Court under the CDP hearing procedures, which was the subject of the court opinion described in this article.

About FBAR Penalties

FBAR penalties can be imposed on U.S. persons who fail to report certain foreign financial accounts to the government. The reporting requirement generally applies if the aggregate value of all foreign accounts exceeds $10,000 at any time during the calendar year.

This reporting is done on FinCEN Form 114 (formerly TD F 90-22.1). The form is due on April 15th and there is an automatic extension to October 15th.

The amount of the penalties can be severe. Non-willful violations can result in penalties of $10,000 per violation. Willful FBAR violations can result in penalties of the greater of $100,000 or 50% of the account balance at the time of the violation. Criminal penalties can also apply in some situations. Notably, for purposes of this article, these penalties are assessed under Title 31 of the U.S. Code (which is the Bank Secrecy Act) and not under the Internal Revenue Code (which is Title 26 of the U.S. Code).

Assessment of FBAR Penalties

While FBAR penalties are not tax penalties, the IRS has been delegated the authority to assess FBAR penalties through a chain of delegation.

The Secretary of Treasury first delegated authority to the Financial Crimes Enforcement Network (“FinCEN”). FinCEN is a bureau of the Department of the Treasury that works to detect and prosecute financial crimes and money laundering. FinCEN then redelegated this authority to the IRS for FBAR penalties.

The typical assessment process begins when an IRS agent conducts an audit and proposes penalties. The IRS then issues Letter 3709 proposing the penalties, and account holders have 30 days to either pay the penalty, request an appeals conference, or provide additional information.

The taxpayer may also trigger an assessment by voluntarily submitting FBAR forms after the due date. The IRS will review the late filing and determine whether to impose penalties. When FBARs are filed through FinCEN’s BSA E-Filing System, the IRS receives this information through an information-sharing agreement with FinCEN. The IRS can then review these late filings as part of its normal examination process.

If the taxpayer files a timely request for appeals review, the IRS Office of Appeals has the ability to consider the proposed FBAR penalties, including whether the violations occurred, whether they were willful or non-willful, whether reasonable cause exists, and whether the penalty amounts are appropriate. Appeals officers can sustain, reduce, or eliminate the proposed penalties based on their review of the facts and circumstances. They can also consider hazards of litigation, meaning they can take into account the IRS’s likelihood of success if the case were to proceed to court. This review is particularly important for willful FBAR penalties, where the government must prove willfulness by clear and convincing evidence in any subsequent litigation. Appeals officers may also consider the ability to pay and can help facilitate alternative payment arrangements if the penalties are sustained.

Remedies After Missing or Unsuccessful Appeal

If account holders miss the appeals deadline or receive an unfavorable appeals decision, there are still several options that may provide remedies.

For example, the account holder can challenge the administrative offset through Treasury procedures. When the Treasury’s Bureau of the Fiscal Service initiates an offset (such as withholding Social Security benefits), they must provide notice to the account holder. The account holder then has certain due process rights under Title 31, including the right to inspect records, request a review of the debt, and establish a payment schedule. They can also present evidence that the offset would create a financial hardship or that the debt is not valid or legally enforceable.

Account holders can also wait for the government to file suit to collect the penalties and raise their defenses in the collection suit. They do not have to pay the penalty and file a refund claim first with this option. This is different from tax assessments, where taxpayers typically must “pay first, litigate later.” When the government files suit to collect FBAR penalties under 31 U.S.C. § 5321(b)(2), the account holder can raise defenses such as reasonable cause, lack of willfulness, statute of limitations, or constitutional challenges. The government bears the burden of proving its case, including proving willfulness by clear and convincing evidence for willful FBAR penalties.

Collection Due Process Not Allowed

Notably absent from the discussion above are the IRS collection programs and procedures. That is the issue in this Jenner court case.

In Jenner, the tax court answers the question as to whether the traditional CDP hearings and rights are available for FBAR penalties. As noted by the court, FBAR penalties are not “taxes” under the Internal Revenue Code and CDP rights only apply to collection of “taxes.”

The court emphasized that the IRS’s authority to assess FBAR penalties does not convert them into tax liabilities. Instead, Title 31 provides its own separate procedures for assessment and collection. The collection mechanism for FBAR penalties is through civil action or administrative offset, not through IRS liens and levies that would give rise to CDP rights.

Thus, while the IRS may assess these penalties, they remain non-tax debts subject to Title 31’s collection procedures rather than the Internal Revenue Code’s collection provisions. The CDP hearing is not a viable option for contesting the assessment or underlying liability for FBAR penalties.

The Takeaway

Unless Congress changes the law, account holders who are assessed FBAR penalties by the IRS do not have fundamental rights, such as CDP rights, that are afforded to taxpayers for tax balances. This is the case even though the same agency whose abuses gave rise to the CDP hearing and CDP rights for taxpayers, the IRS, is involved in assessing FBAR penalties. The remedies outside of the IRS are there, even though they do not afford taxpayers the rights and remedies available for taxes. Account holders have to contend with this when assessed FBAR penalties by the IRS and do not agree with the assessments.